King of Bling

How a poor boy from London's East End became the most exclusive diamond merchant you've never heard of.

British billionaire Laurence Graff, the man jewelry business insiders call the new Harry Winston, swears this story is true: A woman and her husband walk into Graff's shop on London's swanky New Bond Street and ask to see the stunning diamond-and-ruby necklace in the window. It's the woman's birthday and hubby wants to buy her a bauble. At $2 million, however, he feels the price is too steep. Instead he offers $1 million and exits the store, giving the jeweler 24 hours to cash the check. Later that day the lady returns with a second man, her lover. He, too, admires the necklace but finds the price too high. Another $1 million check is written and left on Graff's desk. The dapper jeweler, ever discreet and always the consummate salesman, breathes no word of the birthday girl's earlier visit to his store. Later she returns once more to scoop up her present, and presumably tells each of her benefactors that he has gotten a bargain from the jeweler. Graff cashes both checks.

It has the flavor of a very tall tale. Why does Graff tell it? It adds to the mystique and drama that define his business, the upper tier of jewelry retailing. The 69-year-old Laurence Graff climbed from scrubbing toilets in a Hatton Garden workshop to the helm of a worldwide brand with 15 stores in the globe's wealthiest spots, from Monte Carlo to Dubai to Moscow. Behind this retail chain is a wholesale buying operation: Graff Diamonds International is vertically integrated, taking stones from the rough shapes that come out of the mine to the display case. He sells stones of the greatest weight and highest quality and claims an average transaction price of $400,000. By that score he seems to easily surpass such classic outfits as Cartier, Winston, Van Cleef & Arpels and
Tiffany
.

Graff knows how to cultivate his customers. He once sailed out to meet
Oracle
's Larry Ellison, yacht to yacht, in the Mediterranean to deliver a cache of diamonds Ellison had requested. Saudi Prince Turki bin Abdul Aziz, the Sultan and Queen of Brunei, Oprah Winfrey, Elizabeth Taylor, even soccer star David Beckham and wife, Victoria, all count themselves among Graff's longtime clients. Donald Trump bought Melania's 12-carat emerald-cut diamond engagement ring from Graff's Madison Avenue salon in 2004 for a reported $1 million. "Laurence is a spectacular jeweler," pronounces Trump. "The quality of his stones, the quality of the service and the reputation are the top."

Graff shares quite a few of Trump's traits: charming and outrageously self-promoting, blunt and full of braggadocio, obsessed with superlatives. (He is about to release a glossy $150 coffee table tome, about himself, entitled The Most Fabulous Jewels in the World.) "I'm a complete thoroughbred in the business," proclaims the trim, nattily attired jeweler (suits custom-made in Milan; monogrammed bespoke shirts), with no trace of irony.

Graff also possesses Trump's knack for making money. He's probably worth some $2.5 billion, including homes in Geneva (his legal residence), London, New York and Cap Ferrat in the south of France; a new 150-foot Feadship yacht; a Global Express XRS plane; a winery and vineyard in Stellenbosch, the Napa Valley of South Africa; and a modern and contemporary art collection worth $250 million.

To be sure, sellers of luxury goods--from yachts to art, watches and real estate--have had little trouble raking in fat profits since 2000, a period during which the affluent have been awash in money. Graff rode that luxury boom at his Graff Diamonds International (he owns 100%), where sales jumped from $90 million in 2000 to $400 million in 2006, while aftertax profit grew from $11 million to $48 million.

What distinguishes Graff from the likes of Cartier and Van Cleef is a decision he made a decade ago. Wanting to expand globally and needing a steady supply of diamonds, especially bigger stones, in 1998 he bought a 51% controlling stake in a Johannesburg diamond wholesaler and manufacturer, South African Diamond Corp. (Safdico). Other retailers buy and sell finished diamond jewelry. Graff's wholesale business allows him to cut out the usual middlemen--the brokers, polishers and manufacturers who each take their slice as a rough stone moves up the jewelry chain.

Through Safdico, Graff now buys half of his uncut diamonds from the South African mining behemoth De Beers (Safdico is one of 93 sightholders, or wholesalers who are permitted to buy rough diamonds from De Beers). On the manufacturing rung he employs 370 cutters and polishers in South Africa and Mauritius, who handle smaller goods, and 19 master craftsmen in Antwerp and New York, who work on the larger diamonds. He makes all his own jewelry, in his London and New York workshops. (De Beers has developed its own retail brand in conjunction with luxury conglomerate LVMH Moët Hennessy Louis Vuitton, but it's not competing with Graff at the highest end of the price spectrum.)

This pipeline is especially helpful to Graff with big stones, his specialty. Gross margins at branded jewelry retailers like Tiffany and Cartier hover at roughly 50% for diamonds up to around 5 carats. For bigger stones, where the per-carat price is much higher, those margins get squeezed below 20%. "When you sell a big stone worth $2 million or $3 million," explains diamond analyst Martin Rapaport, "you can't mark them up that high. The person buying that stone is going to be smart and a serious handler."

Indeed, on very large stones of 20 carats and up it may make sense for a jeweler to take no profit: The monster pieces draw attention to the brand. A 50-carat flawless diamond of the highest clarity might wholesale for $100,000 a carat, or $5 million, and sell at retail for not much more than that. There is still money to be made on the very large pieces, however, by someone who buys rough and takes on the labor and risks of chopping up the rock.

A publicly traded entity like Tiffany has to concern itself with inventory turnover; Graff cavalierly maintains a huge inventory of diamonds, with a retail value, he estimates, of $1.5 billion. The stockpile enables Graff to construct jewelry made up of multiple rare diamonds, like the $30 million necklace he sold late last year that could be worth 20% less if each of the diamonds were sold on its own.

These two factors--bulging inventory and vertical integration--help explain why Tiffany's net profit margin sits at 9.6% while Graff puts his at 12%.

Graff can count one potent rival, the Israeli Lev Leviev (see FORBES, Sept. 15, 2003), who has set up a diamond operation even more vertically integrated than Graff's. Leviev owns mines and mining interests (in Africa and Russia), as well as manufacturing and wholesale operations. Now he seems to be gunning for Graff at the retail level. Leviev's sumptuous first store, in London on Old Bond Street, sits a stone's throw from Graff's on New Bond Street, and his second, in Manhattan, will be less than a block from Graff's new boutique on Madison Avenue. Graff is dismissive. "I don't think he's a potential competitor," he sniffs. "He doesn't have a clue what the retail business is all about."

Graff grew up on Commercial Road in London's gritty East End, where he spent his first seven years living in a single room with his Jewish Rumanian immigrant mother, behind the corner sweet shop his Russian father opened just before leaving to fight in World War II. At age 14, in 1952, he was getting such poor marks in school that his family urged him to drop out and start a trade. Graff's first job: apprentice (which included scrubbing floors and toilets) to a jeweler named Schindler in London's Hatton Garden, historic center of the city's diamond and jewelry trade. He was fired just three months later but got another job where he learned how to repair rings and make small pieces of jewelry.

When that business folded a few years later, Graff, now 18, convinced an older man to take him on as an apprentice in a new venture. Soon the two men owed their suppliers $6,000, and Graff says he talked his senior colleague into letting him take over the debt--and the business. By the time he was 22 years old Graff had wheeled and dealed his way to a solvent, one-man enterprise. At age 24 he opened up two small jewelry shops.

But Graff couldn't convince London's top jewelers to buy his competent but lackluster designs. He decided to hit the road. With $1,000 worth of diamond jewelry in a black leather briefcase, Graff stopped at Robinsons department store in Singapore. He ended up landing a jewelry exhibit there every other month. "All of a sudden I was selling $10,000, $20,000 worth of diamonds at a time," he recalls.

He also made an important contact in Singapore, the then prince of Brunei and his wife, formidable collectors of art and jewelry. They became lifelong clients, as did dozens of moneyed Malaysians, Indians and Chinese. The Brunei connection proved extremely valuable. For a period of two decades starting in 1966, Graff says, he traveled to Brunei as frequently as once a month to visit with the royal family, who brought him along to polo matches and gave him an Aston Martin to tool around the kingdom. With him at all times was a briefcase loaded with diamond jewelry.

By the 1970s the Middle East was awash in oil, and Graff's Arab clients were jetting to London to spend their cash. Graff became their point person there. "If they needed a doctor, I found them a doctor. If they needed a car, I found them a car. The Saudi princesses would go shopping, and then they'd come to my office to change into their new clothes."

Graff closed his two small shops and in 1974 opened up a bigger one close to Harrods. One lucky day Saudi Prince Turki bin Abdul Aziz walked in unannounced and "bought out the entire shop," Graff recalls, "including the largest diamond I had in stock, which was 14 carats."

Of course Graff would still travel when a deal was to be made. In the early 1980s, after seeing a Graff exhibition in Hong Kong, a lady-in-waiting to Imelda Marcos invited Graff to the Malacañang Palace for an audience with Madame Marcos. At the end of Graff's week in the Philippines Mrs. Marcos bought three storied gems that he had carried to Manila, for a total of $10 million. Among them: the 42-carat Emperor Maximilian, named for the Austrian archduke who, legend has it, was wearing the diamond around his neck in a pouch when he faced a Mexican firing squad in 1867. Graff bought it at a Christie's auction in 1982 for $726,000.

By the early 1990s, with oil money tapering off and the Sultan of Brunei cutting back on his jewelry purchases, Graff decided his shop near Harrods needed an upgrade. Graff relocated to New Bond Street in the tony Mayfair neighborhood--and went on a real estate shopping spree. He now says that his commercial real estate in London is worth $500 million.

America, where half the world's diamond jewelry is bought, was Graff's next big move. Competitors Cartier and Van Cleef had both been swallowed up by corporate conglomerate Richemont. The top diamond jewelry brand in America, Harry Winston, had descended into chaos after its founder died in 1978 and sons Ronald and Bruce engaged in a nasty legal battle that crippled the business. "There was really a vacuum at the top of the pyramid," recalls Frenchman Henri Barguirdjian, 50, who runs the U.S. operations. "All of our competitors had neglected that end of the market."

Starting in 2001 Graff opened stores in New York, Chicago, Las Vegas (in Steve Wynn's casino) and in Bal Harbour and Palm Beach, Fla. In addition, he cut a deal with
Saks
Fifth Avenue to build three in-store boutiques, in New York, Atlanta and San Antonio, and to sell Graff jewels at Saks stores in five other cities. Graff clients enjoy a range of perks you won't get at Kay Jewelers. In June, for instance, Graff paid to send a burly bodyguard along with an American client who flew to London to attend a function where she planned to wear a multimillion-dollar piece of Graff jewelry.

Graff's one U.S. misstep: a failed attempt to open a store in Beverly Hills. Wynn caused problems, Graff says, because the contract between them gave Wynn a partnership interest in any store within a radius of the Wynn casino, which included Los Angeles, until September 2008. (Wynn declined to comment.) Graff wound up dropping his Rodeo Drive plans, losing $1 million on the deal.

Barguirdjian says each of the U.S. stores has turned a profit within a year of opening. Graff's 800-square-foot Manhattan store, the busiest in the U.S., grossed $65 million last year. A spokesman for Harry Winston declined to answer questions, but two sources in the jewelry business say sales at Winston's Fifth Avenue store last year were 60% of Graff's in New York.

Graff still controls virtually every aspect of his business, including marketing. Graff wrote the ad copy nine months ago for a $30 million 267-carat multicolored diamond necklace: "It took Graff and nature one million years to create this necklace." An Asian client acquired the piece shortly after the ad appeared. If Graff buys a stone that has no name or legend attached? No problem, says François Curiel, international head of jewelry and chairman of Christie's Europe. Graff will simply christen it: the Graff Blue, the Graff Orange, etc., branding the gems and, Graff hopes, increasing their value.

Over the years Graff has brought three family members into the business, including son François, 43, who holds the number two slot at Graff Diamonds, and, Graff says, will eventually take the top job. (François' French mother, Anne-Marie, has been married to Graff for 45 years; the couple has two other children.)

This fall Graff will open stores in Hong Kong, Tokyo and Geneva, double the size of his flagship store in London and undertake construction on a new 4,200-square-foot Manhattan boutique on Madison Avenue.

At the same time, Graff's Safdico wholesale business is expanding, constructing diamond factories and an office park that will eventually employ several hundred workers in Botswana. Graff says he wants to further extend his vertical reach into mining. Last year he failed in his attempt to buy a controlling stake in the Letseng mine in the mountain kingdom of Lesotho. Graff rues the lost opportunity, since just weeks later the 603-carat Lesotho Promise was unearthed there, the fifteenth-largest rough ever discovered. Graff's Safdico ended up buying the stone in October 2006 for $12.4 million. He thinks he can double that investment.

Graff says he's not interested in selling out, even at a time when private equity firms like Ronald Burkle's Yucaipa are investing in British jewelers Garrard and Stephen Webster. "In my thinking, I'm just starting out," Graff says. And he has no taste for going public. He did that in 1973, selling a third of the company, but decided he hated dealing with shareholders and a board. By 1978 he had bought back all the shares.

For now Graff stands alone in his domination of jewelry's upper reaches. Observes Christie's François Curiel: "The Jacques Arpels, Harry Winstons and Gerard Boucherons are long gone from the business. Where else can a customer walk in and see the man behind the brand?".